36.What is Inflation ? INTRODUCTION

Inflation means rise in the general level of prices of goods and services in an economy over a period of time. When prices of goods and services increase, the purchasing power of consumers fall. Inflation can be defined as” the rise in overall price level in the economy, i.e. rise in price of all the goods and services”. When prices rise, people buy fewer goods than they can buy before. Whenever the inflation increases there is not always rise in the price of all commodities but certain commodities prices decreases.

Inflation is commonly understood as an increase in the general price level and consequent fall the value of money. It can have many effects that can have positive and negative effects at the same time, on an economy. Negative effects of inflation include a decrease in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, or may lead to reductions in investment. This can reduce overall economic productivity rates.

CAUSES OF INFLATION:

Increase in Population: when population increases, it leads to increase in the demand of goods and services if supply of a good is less than the demand, it will result in increase in price and inflation.

High Indirect Taxes: Prices also rise due to high excise duties imposed by the Government on raw materials

Black Money: Black money is in the hands of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in prices.

Poor Performance of Farm Sector: If agricultural production especially of food grains production is very low, it would lead to shortage of food grains, which will again lead to inflation.

Expansion of Bank Credit: Rapid expansion of bank credit is also responsible for the inflationary trend in a country.

Deficit Financing: Deficit financing means spending more than revenue. In this case government of India accepts more amount of money from the Reserve Bank India (RBI) to spend for undertaking public projects and only the government of India can practice deficit financing in India

Over- Expansion of Money Supply: When money supply exceeds the availability of goods and services in the economy, it would lead to inflation.

EFFECTS OF INFLATION:

Effects of inflation on fixed income group: Inflation hits wage-earners and salaried people very hard. Since wages do not rise at the same rate and at the same time as the price level of commodities and services, the real income of the wage earner decreases.

Effects of inflation on farmers: Farmers can get better prices for their harvest during inflation, thus they gain during such period.

Effects of inflation on Business Community: Inflation is seen as a positive thing by entrepreneurs and businessmen because they can earn high profits by rising prices. They also find that prices are rising faster than the costs of production, so that their profit is greatly enhanced.

CONCLUSION:

The control of inflation has become one of the major objectives of government’s economic policies in most of the countries. Effective policies to control inflation need to focus on the underlying causes of inflation in the economy. Suppose if the main cause is excess demand for goods and services, then government’s policy should be able to reduce the level of aggregate demand. Inflation is basically the outcome of serious mismatch between demand and supply.But it does not mean that we should not have growth. We should have growth but with moderate rate of inflation, but the consequences of inflation are quite serious. It has bad effect on growth because it increases uncertainty and discourages savings. It is also damaging for the balance of payment, because it makes imports cheaper. To control inflation the government can also take some protectionist measures( such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.)

Submitted by. Rupinder Kumar

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